Emkay Research recommends a BUY call on JK Tyre, projecting an optimistic long-term outlook despite recent challenges. The target price is set at Rs 650, indicating a significant upside potential. The report details various aspects affecting JK Tyre’s performance, such as subdued Q2 results influenced by declines in the Mexico market and currency depreciation, but anticipates improvement as macroeconomic conditions stabilize and internal efficiencies are realized. Below is a summary of key factors, performance highlights, and target levels.

Q2 Performance Overview

Weak Quarter with Expected Recovery
JK Tyre reported a ~16% decline in sales from its Mexico operations, primarily driven by weak Latin American demand and a 10% currency depreciation against the INR. Overall, consolidated revenues dipped by 7% YoY to Rs 36.2 billion. Despite challenges, this quarter is expected to mark a low point, with a recovery anticipated in the following quarters.

EBITDA Margins Under Pressure
The EBITDA for Q2 declined by ~28% YoY to Rs 4.2 billion, with margins shrinking to 11.6%. This decrease is attributed to rising raw material (RM) costs, which escalated by around 6-7% during the quarter, challenging profitability across divisions.

Growth Catalysts Ahead

Domestic Demand Recovery Expected
A domestic demand recovery is projected in the latter half of FY25, fueled by government infrastructure investments, the festive season, and recovering CV and PV segments. As the demand outlook strengthens, the market may better absorb price hikes aimed at offsetting rising input costs.

Anti-dumping Duty in Mexico
Mexico’s imposition of a 32% anti-dumping duty on Chinese PCR and light-truck tires is expected to drive up domestic demand for JK Tyre in the region. The weak Mexican peso supports exports, providing a tailwind for improved performance in Mexico.

Pricing and Margin Strategy

Price Adjustments and Cost Optimization
JK Tyre has taken cumulative price hikes of ~3-3.5% YTD to counteract raw material inflation. Management has indicated further price adjustments, especially in the TBR segment, based on recent declines in raw material costs, specifically rubber prices, which have dropped over 20% from their peak.

Enhanced Product Mix and Operational Efficiencies
Efforts to refine product mix and operational processes are underway, targeting better margins. JK Tyre expects to benefit from a softening in input prices and strategic capacity utilization increases, aiming for margin recovery from Q4FY25 onwards.

Financial Targets and Valuation

12-Month Target Price: Rs 650
Emkay has set a target price of Rs 650, based on a forward P/E of 15x on September 2026E earnings, presenting an attractive valuation at 8.5x versus peers averaging 17.3x.

Revenue and Profitability Projections
Projected revenue growth is set to rebound in FY26-27, with an expected 5% consolidated revenue CAGR and a 13% EPS CAGR over FY24-27E. Adjusted PAT is forecasted to grow to Rs 8.5 billion in FY25E, Rs 11 billion in FY26E, and Rs 13 billion in FY27E.

Investment Risks

Currency Fluctuations and Regional Dependencies
Exposure to international markets, particularly Latin America, leaves JK Tyre vulnerable to currency volatility. A stronger INR against other currencies, if sustained, could limit export competitiveness.

Raw Material Volatility
While rubber prices have corrected, any sharp uptick could hinder margin recovery efforts. Management is closely monitoring these costs and may implement further price adjustments if inflationary pressures persist.

Conclusion: BUY Recommendation with Long-Term Upside

Emkay maintains a BUY recommendation for JK Tyre, citing its undervaluation and potential for a turnaround in demand and profitability. Investors with a long-term horizon can anticipate a favorable return, with upside bolstered by operational efficiencies, strategic pricing, and demand recovery in key segments.